US Dollar: Consolidation view into ISM and payrolls – BBH

Brown Brothers Harriman's Elias Haddad points out the mixed state of the US Dollar as global equities climb and oil prices stabilize. He believes the USD rally from May has likely ended, with the US Dollar Index (DXY) expected to consolidate within a range of 96.00-100.00. The focus today is on US ISM Services Prices Paid and ADP payrolls, with Federal Reserve pricing seen more sensitive to inflation than employment.

The USD rally from May has reportedly run its course, with DXY poised to consolidate within the aforementioned range. The tailwind to USD from resilient US economic activity is being offset by Fed Chair Kevin Warsh's inability to translate tough inflation rhetoric into concrete policy. July ADP private payrolls are anticipated to demonstrate persistent labor demand, with the economy projected to add around 65,000 jobs in July, compared to 98,000 in June.

The July Services ISM is expected to show robust growth momentum, with the headline index expected to rise to 54.5 from 54.0 in June, driven by an increase in new orders. However, the Prices Paid index is anticipated to ease to a five-month low of 65.0, signaling diminishing upside risk to inflation. Kansas City Fed President Jeff Schmid, a non-FOMC voter, delivered hawkish remarks overnight, stating that the US economy is performing well but that inflation is too high, necessitating tighter policy.

Fed Governor Lisa Cook is set to speak on the economic outlook later today. Fed participants largely agree that the labor market is balanced, but they are divided on the durability of the inflation threat, making Fed fund futures more sensitive to inflation data than employment data. The US Treasury's decision to double the size of liquidity support buyback operations for longer-dated nominal coupon securities is significantly impacting the US Dollar, contributing to its rally.

Earlier, UK data revealed that annual Consumer Price Index (CPI) inflation increased to 2.9% in July, meeting estimates, while core CPI rose by 2.6% year-over-year in July versus expectations. EUR/USD is gaining bullish momentum and trading at its highest level since early June above 1.1650. Despite the US Dollar's substantial bearish pressure after the US Treasury announced an increase in liquidity support buyback operations for longer-dated nominal coupon securities, the market will closely monitor FOMC minutes for fresh clues on the policy outlook.

Gold (XAU/USD) enters Wednesday's American trading hours with solid gains, supported by a weaker US Dollar and a significant drop in long-term US Treasury yields, as the metal recovers from previous day's losses. Bitcoin's upside remains capped on Wednesday, with downside supported above $64,000.